Fitch Ratings has downgraded Portugal's Long-term foreign and local currency IDRs to 'AA-' from 'AA'. The Rating Outlooks on the Long-term IDRs are Negative. Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term.

The dispute has been triggered by Portugal’s sovereign debt difficulties, which have virtually cut off access to capital markets for Portuguese banks, forcing them to rely heavily on funding from the European Central Bank.

Banco EspÃ­rito Santo, one of Portugal’s top five banks, said it was terminating its contract with Fitch Ratings because there was ‟no valid justification” for downgrading its credit rating by three notches in less than four months.

I have never seen a downgrade to which the downgraded entity responds ‟not surprising, and a bit overdue”. Never. Stupider sovereigns threaten this and that (Turkey, in the 1990s, threatened a libel suit!); companies claim that the downgrade is unjustified. Always the way.

The decision, which follows two downgrade warnings by other rating agencies this month, will add to investor fears that Portugal might be forced to follow Greece and Ireland in seeking an international financial bail-out.

Portuguese bond yields jumped above 7 per cent ”“ a level that Lisbon has admitted is unsustainable ”“ after concerns rose that the eurozone crisis could worsen, following comments from Wolfgang SchÃ¤uble, the German finance minister.

Mr SchÃ¤uble appeared to put the brakes on plans to increase the size and scope of the €440bn ($588bn) European financial stability facility, at the end of ministerial meetings in Brussels.

Ralf Preusser, head of European Rates Research at BofA Merrill Lynch Global Research, said: ‟Every time policymakers see an improvement in market sentiment, even if in anticipation of policy action, they feel they are justified in stepping back from support. The market had traded positively because of hopes that we would get meaningful changes to the size and scope of the EFSF. This has now not materialised.”

The FT, in an article entitled [url=http://www.ft.com/cms/s/0/1105112e-4bd7-11e0-9705-00144feab49a.html]Portugal unveils tougher austerity measures[/url], wrote:Portugal has announced tough new austerity measures including cuts of up to 10 per cent in state pensions in a bid to ease pressure building on the government to seek a financial bail-out.
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‟There can no longer be any doubt that we will achieve our goals,” he said. The minister also announced labour market reforms to improve the competitiveness of the Portuguese economy, which is facing its second recession in three years.
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But the measures failed to have a positive impact on Portugal’s cost of borrowing with the yield on 5-year government bonds rising to a new euro-era high of just under 8 per cent. The yield on 10-year bonds also rose to 7.565 per cent.

S&P also warned that it could cut Lisbon’s rating by a further notch depending on the outcome of negotiations on the eurozone’s bail-out fund.

S&P’s decision on Thursday night came hours after Fitch Ratings downgraded Portugal’s long-term rating by two notches from A+ to A- because of increased financing risks caused by the fall of the Socialist government.

S&P and Fitch have both placed Portugal’s ratings on negative outlook, implying further downgrades could be made in the near future.

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Interest rates on Portuguese government bonds of all maturities shot up on Thursday amid fears that the political void left by the prime minister’s resignation would make it difficult for the country to meet a total of €9.5bn in debt payments due in April and June.

The bank downgrades follow S&P’s decision to cut Portugal’s long-term sovereign debt credit rating by two notches to triple B on Friday, after the collapse of the Socialist government plunged the country into a period of political and financial uncertainty.

The agency warned on Monday that a further cut in Portugal’s sovereign rating ‟could take place as early as this week”. That would lower the rating to triple B minus, one level above junk status.
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S&P lowered the long-term ratings of four banks ”“ Banco EspÃ­rito Santo, Banco BPI, Caixa Geral de DepÃ³sitos and Banco Santander Totta ”“ to triple B, in line with the agency’s sovereign rating for Portugal. The previous ratings were A for Santander Totta and A minus for BES, BPI and CGD.

Tuesday’s downgrade, the second in a week, comes after the fall of the Socialist government plunged the country into a political crisis. It sent Portugal’s borrowing costs soaring.

Shares in Portuguese banks also fell sharply as S&P said it would assess the impact on lenders of its cut in the country’s sovereign rating. The agency cut the ratings of five Portuguese banks on Monday.

S&P cut Portugal’s rating to the lowest investment grade of triple B minus. Another downgrade to junk would have far-reaching implications for Lisbon as many investors can only buy investment grade bonds.

The IMF’s acronym is said to stand for ‟It’s mainly fiscal”. This maxim has certainly been applied by the IMF and the EU to Portugal, just as it was to the other struggling eurozone states. However, Portugal’s problem is one of foreign debt. Its ratios of public debt and deficit to gross domestic product are similar to France’s, yet France is not close to a fiscal crisis. This is because Portugal’s crisis is born not of public borrowing, but the debt of its private sector, in particular banks.

I have been intending to buy a copy of that work for a while but keep holding off on the basis that a new edition is surely just around the corner

jdaw1 wrote:As well as the rating (described on both of the above), there is also an outlook, which speaks of the likelihood of a rating change in the near future.

I may not have been paying enough attending in my statistics lessons but surely if you say the outlook (meaning the likelihood of change) is negative, then you mean that it has already changed? And are ‟Speculative grade” ratings really known as either ‘‟High Yield” or ‟Junk”’, without irony?

JacobH wrote:I may not have been paying enough attending in my statistics lessons but surely if you say the outlook (meaning the likelihood of change) is negative, then you mean that it has already changed? And are ‟Speculative grade” ratings really known as either ‘‟High Yield” or ‟Junk”’, without irony?

It seems that you were paying plenty of attention. Market participants treat a directional outlook (positive or negative) as a fractional move in rating.

But sometimes companies being taken over have a non-directional ‘events might move this up or down’ outlook, which doesn’t quite fit the same model.